Mortgage repricing bolsters bank oligopoly

Long-dominant oligopolies within supermarkets, general insurance and telecoms may be breaking down, but the strong position of the big four banks is “strong and functioning well”, according to a global investment management firm.

In a note to investors, T. Rowe Price head of Australian equities Randal Jenneke said the strength of the major banks is best evidenced by the recent repricing of their mortgage books, essentially raising rates themselves without a shift in official interest rates.

“The action sends an important signal to the market that the oligopoly is still strong and functioning well,” he said.

“If you look at other oligopolies in Australia – supermarkets, general insurance, and telecoms – they are all breaking down. Banks remain the last strong oligopoly, which is a main reason why we have been allocating capital to the sector recently.

“With the capital requirement issue largely completed, and given the reasonable-looking credit cycle, we think that this is the most attractive the banks have looked in years.”

Mr Jenneke said that while the major banks have struggled as a result of requirements to hold additional capital and ongoing concerns about a turn in the credit cycle leading to higher bad debts, T. Rowe Price is not “overly concerned” about either issue.

“First, the banks have injected a lot of capital into their businesses, driven by post-crisis regulatory requirements – this now looks to be drawing to an end, which is likely to be positive for the sector,” he said.

Second, bank bad debts may be at “multi-decade lows”, meaning things that can only get worse from here, but T. Rowe Price “is not seeing any evidence of this”, Mr Jenneke said.

“We expect this scenario to continue, particularly for the domestic mortgage-based banks, where exposure is closely tied to the strong property market,” he said.

“While some of the business banks look more exposed and may be hit on some of their corporate loan exposure, at an overall level, we think the backdrop looks manageable.”